Finance and economics

• Under intensive care
  

  UBS and Citigroup take steps to reassure investors. But big questions remain

  SURGERY, as any doctor knows, is just one step on the road to recovery. Two of the biggest banking casualties of the carnage in America's mortgage market are out of the operating theatre--though not by any means in the clear. On December 11th, after five leaderless weeks, America's Citigroup announced that Vikram Pandit, the head of its investment-banking division, would be its new chief executive. The previous day Switzerland's UBS had unveiled write-downs and capital injections designed to reassure investors that the worst of the subprime crisis was over. But the long-term prognosis on these two huge banks remains decidedly uncertain.

  UBS looks the healthier. Its announcement of a $10 billion write-down on its exposure to subprime-infected debt, to go with a third-quarter hit of $3.6 billion, hardly sounds like good news. UBS now expects a loss for the fourth quarter, which ends this month. It may end up in the red for the entire year. But in today's topsy-turvy market, the bank's decision to take a much more conservative view of the value of its assets was welcomed as a sign that further big mark-downs are less likely. ...

• On safari
  

  Sub-Saharan Africa is becoming an increasingly attractive hunting ground

  THIS month Omar Bongo--the longest-serving ruler in Africa--celebrated 40 years in power in Gabon. In Libreville pictures of him hang everywhere. But outside the country, Gabon achieved a far more impressive landmark, when it raised $1 billion on the international markets--becoming only the third country in continental sub-Saharan Africa in two decades to issue sovereign bonds abroad.

  The West African country has oil, close ties with China and better-managed public finances, which are three of the ingredients sought after by Africa's foreign creditors--even those who may struggle to find Gabon on a map. Increasingly, other African countries, including those without oil, are also arousing interest among outsiders. Ghana launched an international sovereign bond in September. Kenya, and possibly Zambia and Tanzania, hope to follow. ...

• Monologuing
  

  The "Strategic Economic Dialogue" fails to produce much strategy or dialogue

  WHEN Hank Paulson left Goldman Sachs to become America's treasury secretary last year, one of the few perks of the job was the chance to put his impressive links with China to good use in the service of his country. He had, after all, visited China at least 70 times.

  Diplomacy on behalf of a bulge-bracket investment bank has proved to be far easier than dealmaking between Washington, DC, and Beijing, however. That, at least, is the conclusion from the third round of the cabinet-level Strategic Economic Dialogue between December 12th and 13th. ...

• A dirty job, but someone has to do it
  

  In concert, central bankers try showering cash on the credit crisis

  CENTRAL bankers are supposed to be boring and predictable. But on December 12th the rich world's monetary authorities stunned financial markets with a dramatic, joint plan to ease the liquidity squeeze in global money markets. America's Federal Reserve, the Bank of England, the European Central Bank (ECB), the Bank of Canada and the Swiss National Bank all pitched in. The central banks of Sweden and Japan said they, too, were watching developments and would act as necessary. All told, it was an impressive show of central-bank co-ordination.

  Financial markets have been seizing up for weeks. The spreads between the federal funds rate and the prices charged by banks to borrow from each other have widened dramatically since early November (see chart). By some measures, the financial system is more blocked than it was in September. And it has long been clear that central banks' attempts to sort out the mess were failing. The Fed's discount window, for instance, through which it lends direct to banks, has barely been approached, despite the soaring spreads in the interbank market. ...

• The uncomfortable rise of the rupee
  

  Is India suffocating from too much foreign attention?

  INDIA, it is fair to say, is not yet reconciled to the new-found strength of its currency. One poor wretch, pressed against the car window at a Delhi traffic light, tries to change a dollar bill she presumably cadged off a tourist. She wants 50 rupees for it.

  Alas, the dollar now fetches less than 40 rupees (see left-hand chart). India's currency has strengthened by about 15% against the greenback in the past year and by over 10%, on an inflation-adjusted, trade-weighted basis, since August 2006. The rupee's rise may be less dramatic than that of the Philippine peso, Brazilian real or Turkish lira. But it is uncomfortable nonetheless. ...

• This year's model
  

  Looking for growth stocks when there is not much growth

  THE catwalks of Paris are not the only places where fashion is on display. It works in investment too. And this year has seen as dramatic a shift as that 25 years ago when hot pants and disco suits gave way to big hair and padded shoulders.

  Growth stocks are the new retro chic. Having dominated the financial markets in the late 1990s, the growth style of investment has fallen mightily out of vogue since the collapse of the dotcom bubble. ...

• Been there, done some of that
  

  Lessons from Japan's financial crisis should worry, and embarrass, America

  ANOTHER month, another bank in trouble, another raised estimate of bad assets in the financial system, and another move by the central bank to try and contain the problem: to observers in Japan, America's spreading credit crunch has an eerily familiar ring.

  Though differences between the subprime crisis and the bursting of Japan's own property bubble after 1989 are inevitably great, the similarities are striking. As Kazuto Uchida, chief economist at Bank of Tokyo-Mitsubishi UFJ, points out, both the Japanese and American bubbles were inflated at a time of financial experimentation and easy credit. America saw a huge growth in the securitisation of mortgage assets and "structured investment vehicles" when the Federal Reserve was providing cheap money. Similarly, Japan in the mid-1980s faced pressure from the United States to liberalise its markets. That sparked a wave of "financial engineering", and the proliferation of new products such as derivatives. The cocktail was given added fizz by American pressure to revalue the yen: in response to a rising currency, the Bank of Japan (BoJ) cut interest rates, flooding the economy with cheap cash. All of which reinforced an impression that the economy had broken free from the usual boom-and-bust cycles. ...

• Subprime solutions
  

  The promise and pitfalls of the Treasury's plan for mortgage-loan modifications

  IS HANK PAULSON repairing America's mortgage markets or wrecking them? That question may sound churlish as the treasury secretary scrambles to stop the subprime mortgage mess dragging the economy into recession. But the palliatives that politicians produce today will shape tomorrow's system of mortgage finance. And with the Treasury now cajoling lenders into modifying whole swathes of subprime mortgages, policymakers are at something of a crossroads.

  Mr Paulson's attitude to the subprime mess has, to put it charitably, evolved over the past few months. Half a year ago, he was firmly hands-off. The market should be left well alone, to shake out weak subprime borrowers and imprudent lenders. By the end of the summer, with credit markets in turmoil and Democratic politicians demanding help for beleaguered homeowners, Mr Paulson had changed tack. Prudent subprime borrowers--those who were in a house they might reasonably afford, but who had missed payments because their mortgages had reset to higher interest rates--should be brought into the orbit of government-sponsored lending by expanding the Federal Housing Administration (FHA), a Depression-era outfit that insures mortgages for poorer people. The initiative was modest; the direction was clear. The federal government would help a subset of subprime borrowers and use its own institutions to do so. ...

• Freezing in Florida
  

  State investment pools rue their brush with structured finance

  ANOTHER week, another new and unlikely type of victim in the subprime-mortgage mess. As if the pounding received by banks, hedge funds, homebuilders, bond insurers and even discount brokers was not enough, the pain is spreading to usually sleepy corners of local government, thanks to state cash-management funds that were not quite as safe and liquid as advertised.

  The fund at the centre of the latest debacle is Florida's Local Government In